Micro finance institutions (MFIs) are seeking a dedicated funding window, credit guarantee mechanism, and equity funding arrangements from the upcoming Union Budget as access to capital continues being a challenge, especially for mid and small sized MFIs.

“We are meeting with DFS Secretary on January 8th along with some leading MFIs. One major concern right now is funding requirement of MFIs, especially smaller and mid-sized ones,” said Jiji Mammen, ED & CEO of RBI appointed self-regulatory organisation for MFI sector.

“Getting funds is a problem, and cost of borrowing is also becoming higher. So we are requesting the government for creating a dedicated fund for borrowings of micro-finance institutions. Or they can create a credit guarantee mechanism, so that MFIs can borrow from banks and other institutions,” he said.

Funding woes

The MFI sector is witnessing lower investor appetite due to higher credit cost. MFIs have also tightened loan underwriting norms. Sa-Dhan had in July 2024 restricted MFIs to extend loans to households with over ₹2 lakhs in debt, while also mandating its members to not give loans to bad loan accounts with over ₹3,000 outstanding.

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Separately, MFIs are also seeking some equity funding arrangement. “MFIs need growth capital for their expansion, and capital has to come from some investors. Earlier there were impact investors who were active in MFI space but now we don’t have those supporting the smaller institutions. It would be good if Government can create an equity funding mechanism for the MFIs so that they can get the equity support and grow their operations,” Mammen said, adding that Sa-Dhan will also hold an event in Mumbai this month where lenders, investors and MFIs will hold detailed discussions to ensure smooth fund flow.

Another core issue pertaining to MFI sector is loans given to newly formed self-help groups (SHG). Mammen says presently the core problem with funding to SHGs is that such groups’ liability or repayment data is not available with credit bureaus.

“Many SHG members are also members of MFI companies. So while assessing the credit exposure, the SHG data is not captured and can lead to over leveraging. We have been taking up this issue with the RBI and government,” he said.

Asset quality trends

Nuvama Research says lenders’ MFI loans and unsecured loans will continue to see elevated stress in Q3, with lenders like HDFC Bank, ICICI Bank, Federal Bank and state banks likely to face less stress while predominantly micro loan lenders would see a sharp deterioration.

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According to Mammen too, while Q3 numbers maybe a “bit better” than Q2, it will not be significantly better. “Collections have started looking better than earlier and we expect that even if things don’t improve in Q3, Q4 should show better results. In Q2, Bihar, Uttar Pradesh, Tamil Nadu a bit, Punjab and Kerala had little higher delinquencies,” he said.

There are multiple factors affecting the MFI sector, Mammen says, as there was some slow down in rural economy, but with good Kharif season, things could improve. “In fact, a full revival in rural economy has not happened yet after the Covid 19. That may have led people to borrow more, leading to over leveraging,” he said.